Preserving the “Secret” in “Secret Sauce” During Business Litigation in the USA

For many businesses, trade secrets and confidential/proprietary business information can be among their most valuable assets, and maintaining their secrecy is critical to continued success. As technology has made copying and sharing information easier, misappropriation of such information has become more common. Whether it is a disloyal employee or a competitor attempting to obtain information through corporate espionage, litigation may be needed to protect your secrets.

Generally, protection of trade secrets in the USA is governed by the Uniform Trade Secrets Act (UTSA). In total, 48 states have adopted the UTSA. Section 1(4) of the UTSA defines a trade secret as information that “derives independent economic value from not being generally known […] and not being readily ascertainable by proper means” and “is the subject of efforts that are reasonable under the circumstances to maintain its secrecy”.

New York has not adopted the UTSA, so businesses must rely on common law for protection. In New York, a trade secret is “any formula, pattern, device or compilation of information [that] is used in one’s business and which gives [one] an opportunity to obtain an advantage over competitors who do not know or use it” (Ashland Mgmt Inc v Janien, 82 NY2d 395, 407 (1993) (citation omitted)). 

Determining whether something fits within this definition is more of an art than a science and is generally “a question of fact” (Id). Courts have, however, identified factors they consider:

(Id. (alterations in original) (quoting Restatement of Torts Section 757, comment b); see also Schroeder v Pinterest Inc, 133 AD3d 12, 27 (1st Dep’t 2015)).

The Appellate Division has also discussed what constitutes confidential and proprietary information. In Marcone APW, LLC v Servall Co, the court granted injunctive relief to prevent misuse of misappropriated customer lists (Marcone APW, LLC v Servall Co, 85 AD3d 1693, 1695 (4th Dep’t 2011)). The court explained that the customer lists were “not simply compilations of customer names and addresses or phone numbers” but instead “contain detailed information about each customer, including the names of individual contact persons, customer-specific pricing information, credit terms and limits, and rankings based upon their margin performance” (Id.) As a result, the court held that the customer lists were “confidential and proprietary information” because the information contained within “was compiled through considerable effort by [plaintiff] and its employees over several years and was not available to the public” and “created a competitive advantage for [plaintiff] in servicing its current clients and creating new business” (Id. at 1694–96 (alterations in original)).

Misappropriation occurs when a party uses trade secrets or confidential business information in breach of an “agreement, confidence, or duty, or as a result of discovery by improper means” (EJ Brooks Co v Cambridge Sec Seals, 31 NY33d 441, 452 (2018) (citation omitted)). Bad actors can use the information to steal customers, create counterfeit products, copy manufacturing processes, improve their own products, or increase profits using otherwise secret information. Delay in addressing this misconduct is ill-advised.

The nature of trade secrets and confidential business information, which get their value from remaining secret, creates a tension between disclosure and secrecy that is rare in other cases. Court proceedings, by their nature, are conducted with a presumption of public access. Moreover, New York law “strongly encourages open and full disclosure” during discovery as a matter of policy (MSCI Inc v Jacob, 120 AD3d 1072, 1075 (1st Dep’t 2014)). Accordingly, disclosure of and public access to information during litigation is the default.

To protect confidential business information during litigation, first it must be identified. In New York, “[a] plaintiff is required to precisely identify the trade secrets it alleges that the defendant misappropriated” (Valkyrie AI LLC v PriceWaterhouseCoopers LLP, 233 AD3d 460, 461 (1st Dep’2024)). Before doing this, however, a litigant can take steps to protect the confidential nature of the subject materials by obtaining a confidentiality order or even a sealing order. Further, courts can require that trade secrets be disclosed subject to “attorneys’ eyes only” designation, which permits only the attorneys in the case to view the trade secrets. This prevents competitors from viewing trade secrets during the course of litigation.

If the harm to a business warrants criminal prosecution, turning the matter over to law enforcement may be the right move. But prosecutors do not represent the business and may not share the goal of maintaining the secrecy of company information. Although prosecutors and law enforcement do great work, their first duty is to prosecute the criminal, not necessarily represent business interests. An attorney represents the interests of a business, which should certainly include protecting its secrets.

Trade secrets and confidential business information can be a business’s most valuable assets. To protect those secrets, litigation may be required, and there is a right way and a wrong way to pursue such litigation. Moreover, because of the disclosures required in litigation, parties should take steps to safeguard trade secrets during litigation.